(01-19-2014, 08:42 AM)Robandcindy2 Wrote: With some time to kill before the Brady-Manning show today I thought I'd get a discussion going on stock valuation. Specifically, how you determine a stocks "buy price".
I've read about several formulas and theories yet have never quite wrapped my arms around one that I felt was consistent. Graham Formula? Piotroski? DCF? Lots to choose from.
Recently I "blew a financial gasket"over KMB. KMB had been on my radar for a long time. First waiting to have the cash set aside and then waiting for the price to drop.
The only newsletter I subscribe to is Morningstar Dividend Investor run by Josh Peters. Josh had a KMB fair value price of $92. I'm finally ready to go for it and had a limit order in at $91.99 at Vanguard.
Thanks to Congress the price started coming down. Now I admit I wasn't watching things to closely and KMB bottomed at $92 and change I believe in September. It has since topped $106. So close....sooo close...
Discussion:
What do you use to determine a stocks fair value or buy price (not that they are necessarily the same thing)?
Is "value investing" necessary for the DG investor?
Thoughts on investing in companies which are historically priced above fair value (KMB, GPC, to name two)?
Enjoy the games today!
Rob
Go Pats!
I think value investing is still very important in DGI. I suppose it could be less important if you are entering retirement and relying solely on dividend income with no further worries about capital appreciation, but in my mind why not have your cake and eat it too?
I have a pretty simple process when looking for prospective companies. First I look at Fastgraphs to see how it is trading in respect to historical valuations over a few different time frames. I'll look at 20 year, 10 year and 5 year charts to see how they all compare. Sometimes as a company matures and growth slows what appears to be a value at current PE is actually fairly priced due to slower EPS growth rates than in the past.
If the stock passes the first test then I will look at the key statistics information on Yahoo Finance to see ROE, debt levels, cash on hand and free cash flow generation. I love companies with low debt and great cash flow.
Finally, if it still looks interesting I will go to the company website and look for investment presentations. I will read a few of these from the past year and see if I like the business model and growth prospects.
If everything looks good I put the stock on my watch list or try to find room for it in my portfolio. Once I do make a decision to buy I put a limit order in near the current price and make a buy. At this point I don't nickle and dime things. If I've determined its near fair value I buy it, I don't want to lose out on something because I was too stubborn to raise my limit order $1.
As for KMB and GPC, I agree they are both a bit overvalued right now and I personally wouldn't buy either here. I own GPC at about $72.
I'm sure if you bought either and held for 10 years you'd probably do okay with 5-7% annual returns and reliable dividend growth. As a 35 year old looking to build my portfolio I'm looking for better capital gains than that.